Edgar Filing: AXIS CAPITAL HOLDINGS LTD

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

Commission file number 001-31721

AXIS CAPITAL HOLDINGS LIMITED

(Exact name of registrant as specified in its charter)

Bermuda		98-0395986
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

106 Pitts Bay Road, Pembroke HM 08, Bermuda

(Address of principal executive offices and zip code)

(441) 296-2600
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of August 7, 2006 there were 152,055,531 Common Shares, $0.0125 par value per share, of the registrant outstanding.

AXIS CAPITAL HOLDINGS LIMITED

INDEX TO FORM 10-Q

	PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets as at June 30, 2006 and December 31, 2005 (Unaudited)

	Consolidated Statements of Operations for the Quarters and Six Months Ended June 30, 2006 and 2005 (Unaudited)

	Consolidated Statements of Comprehensive Income for the Quarters and Six Months Ended June 30, 2006 and 2005 (Unaudited)

	Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2006 and 2005 (Unaudited)

	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005 (Unaudited)

	Notes to Consolidated Financial Statements (Unaudited)

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.	Quantitative and Qualitative Disclosures about Market Risk

Item 4.	Controls and Procedures

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings

Item 1A	Risk Factors

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

Item 4.	Submission of Matters to a Vote of Security Holders

Item 6.	Exhibits

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

AXIS CAPITAL HOLDINGS LIMITED

CONSOLIDATED BALANCE SHEETS (UNAUDITED)
As at June 30, 2006 and December 31, 2005
(Expressed in thousands of U.S. dollars, except share amounts)

	June 30, 2006			December 31, 2005
	(Unaudited)
Assets
Cash and cash equivalents	$	1,615,448		$	1,280,990
Fixed maturity investments at fair market value (Amortized cost 2006: $6,179,129; 2005: $6,090,998)	6,009,431			6,012,425
Other investments	627,721			409,504
Accrued interest receivable	68,381			59,784
Securities lending collateral	909,807			998,349
Insurance and reinsurance premium balances receivable	1,409,988			1,026,975
Deferred acquisition costs	290,627			196,388
Prepaid reinsurance premiums	309,881			281,579
Reinsurance recoverable balances	1,271,452			1,455,248
Reinsurance recoverable balances on paid losses	121,091			62,862
Intangible assets	35,500			37,013
Other assets	129,723			104,859
Total Assets	$	12,799,050		$	11,925,976

Liabilities
Reserve for losses and loss expenses	$	4,835,161		$	4,743,338
Unearned premiums	2,289,140			1,760,467
Insurance and reinsurance balances payable	333,547			314,232
Accounts payable and accrued expenses	75,393			101,179
Securities lending payable	904,974			995,287
Net payable for investments purchased	43,012			76
Debt	499,100			499,046
Total Liabilities	8,980,327			8,413,625

Shareholders’ Equity
Share Capital
Series A Preferred shares (issued and outstanding 2006: 10,000,000; 2005: 10,000,000)	125			125
Series B Preferred shares (issued and outstanding 2006: 2,500,000; 2005: 2,500,000)	31			31
Common shares (issued and outstanding 2006: 149,809,873; 2005: 148,868,759)	1,873			1,861
Additional paid-in capital	2,413,410			2,386,200
Accumulated other comprehensive loss	(166,580		)	(77,798		)
Retained earnings	1,569,864			1,201,932
Total Shareholders’ Equity	3,818,723			3,512,351

Total Liabilities & Shareholders’ Equity	$	12,799,050		$	11,925,976

See accompanying notes to Consolidated Financial Statements (Unaudited)

AXIS CAPITAL HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

For the Quarters and Six Months ended June 30, 2006 and 2005
(Expressed in thousands of U.S. dollars, except share and per share amounts)

	Quarters ended						Six Months ended
	June 30, 2006			June 30, 2005			June 30, 2006			June 30, 2005
Revenues
Gross premiums written	$	995,380		$	767,293		$	2,160,120		$	1,965,992
Premiums ceded	(174,648		)	(151,497		)	(347,060		)	(288,125		)
Change in unearned premiums	(141,633		)	8,617			(500,367		)	(427,864		)
Net premiums earned	679,099			624,413			1,312,693			1,250,003

Net investment income	91,663			58,001			185,231			110,759
Net realized (losses) gains	(9,777		)	1,831			(20,706		)	438
Other insurance related income (loss)	438			(5,451		)	1,062			(5,519		)
Total revenues	761,423			678,794			1,478,280			1,355,681

Expenses
Net losses and loss expenses	371,982			322,853			730,640			667,143
Acquisition costs	101,832			85,471			191,536			176,772
General and administrative expenses	57,657			56,796			113,068			111,098
Foreign exchange (gains) losses	(18,901		)	27,226			(28,165		)	50,644
Interest expense	8,315			7,818			16,400			15,897
Total expenses	520,885			500,164			1,023,479			1,021,554

Income before income taxes	240,538			178,630			454,801			334,127
Income tax expense	7,912			5,785			17,359			9,483
Net income	232,626			172,845			437,442			324,644
Preferred share dividends	(9,226		)	—			(18,857		)	—
Net income available to common shareholders	$	223,400		$	172,845		$	418,585		$	324,644

Weighted average common shares and common shares equivalent — basic	149,765,181			140,566,523			149,541,163			143,584,354

Weighted average common shares and common shares equivalents outstanding — diluted	163,325,459			153,637,750			163,441,641			157,013,504

Net income per common share - basic	$	1.49		$	1.23		$	2.80		$	2.26

Net income per common share - diluted	$	1.37		$	1.13		$	2.56		$	2.07

Dividends declared per common share	$	0.15		$	0.15		$	0.30		$	0.30

See accompanying notes to Consolidated Financial Statements (Unaudited)

AXIS CAPITAL HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
For the Quarters and Six Months ended June 30, 2006 and 2005
(Expressed in thousands of U.S. dollars)

	Quarters Ended						Six Months Ended
	June 30, 2006			June 30, 2005			June 30, 2006			June 30, 2005
Net income	$	232,626		$	172,845		$	437,442		$	324,644
Other comprehensive income, net of tax
Net actuarial loss on defined benefit retirement plan	(384		)	—			(384		)	—
Unrealized (losses) gains on investments arising during the period	(13,130		)	50,699			(76,816		)	(7,367		)
Adjustment for re-classification of losses realized in income	(18,827		)	(1,560		)	(11,581		)	(5,803		)
Comprehensive income	$	200,285		$	221,984		$	348,661		$	311,474

See accompanying notes to Consolidated Financial Statements (Unaudited)

AXIS CAPITAL HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
For the Six Months ended June 30, 2006 and 2005
(Expressed in thousands of U.S. dollars)

	2006			2005
Preferred Shares
Balance at beginning and end of period	$	156		$	—
Common Shares
Balance at beginning of period	1,861			1,910
Issued during period	12			8
Repurchased during period	—			(160		)
Balance at end of period	1,873			1,758
Additional paid-in capital
Balance at beginning of period	2,386,200			2,017,144
Shares issued during period, net of costs	153			(1,691		)
Repurchased during period	—			(349,840		)
Stock option exercise	14,321			2,240
Stock option expense	1,715			2,204
Stock compensation expense	11,021			10,091
Balance at end of period	2,413,410			1,680,148
Accumulated other comprehensive income (loss)
Balance at beginning of period	(77,798		)	12,915
Change in net actuarial loss on defined benefit retirement plan	(384		)	—
Change in unrealized losses on investments	(89,896		)	(12,371		)
Change in deferred taxes	1,498			(799		)
Balance at end of period	(166,580		)	(255		)
Retained earnings
Balance at beginning of period	1,201,932			1,206,095
Preferred shares dividends	(18,857		)	—
Common share dividends	(50,653		)	(45,794		)
Net income for period	437,442			324,644
Balance at end of period	1,569,864			1,484,945
Total Shareholders’ Equity	$	3,818,723		$	3,166,596

See accompanying notes to Consolidated Financial Statements (Unaudited)

AXIS CAPITAL HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months ended June 30, 2006 and 2005
(Expressed in thousands of U.S. dollars)

	2006			2005
Cash flows provided by operating activities:
Net income	$	437,442		$	324,644
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Net realized losses (gains) on sales of investments	20,706			(438		)
Change in carrying value of other investments	(12,442		)	901
Net amortization on fixed maturities	15,315			13,997
Amortization of deferred compensation and option expense	12,736			12,295
Amortization of intangible assets	1,513			767
Amortization of deferred debt expenses	226			228
Accrued interest receivable	(8,597		)	(7,084		)
Insurance and reinsurance premium balances receivable	(383,013		)	(315,759)
Deferred acquisition costs	(94,239		)	(52,409		)
Prepaid reinsurance premiums	(28,302		)	1,562
Reinsurance recoverable balances	183,796			(51,547		)
Reinsurance recoverable balances on paid losses	(58,229		)	(179		)
Other assets	(23,926		)	(20,656		)
Reserve for losses and loss expenses	91,823			525,139
Unearned premiums	528,673			426,302
Insurance and reinsurance balances payable	19,315			3,813
Accounts payable and accrued expenses	(32,140		)	(5,707		)
Total adjustments	233,215			531,225
Net cash provided by operating activities	670,657			855,869
Cash flows provided by (used in) investing activities:
Purchases of available—for—sale securities	(2,606,910		)	(3,115,413		)
Sales and maturities of available—for—sale securities	2,531,902			2,974,763
Purchases of other investments	(210,750		)	(163,998		)
Net cash used in investing activities	(285,758		)	(304,648		)
Cash flows provided by (used in) financing activities:
Common share dividends	(45,574		)	(40,802		)
Preferred shares dividends	(19,353		)	—
Repurchase of shares, net	—			(350,000		)
Issuance of shares, net	14,486			556
Net cash used in financing activities	(50,441		)	(390,246		)
Increase in cash and cash equivalents	334,458			160,975
Cash and cash equivalents — beginning of period	1,280,990			632,329
Cash and cash equivalents — end of period	$	1,615,448		$	793,304
Supplemental disclosures of cash flow information:
Income taxes paid	$	31,223		$	22,555
Interest paid	$	14,375		$	15,677

See accompanying notes to Consolidated Financial Statements (Unaudited)

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Expressed in thousands of U.S. dollars, except share and per share amounts)

1. Basis of Preparation and Consolidation

These unaudited consolidated financial statements include the accounts of AXIS Capital Holdings Limited (“AXIS Capital”) and its subsidiaries (together, the “Company”) and have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, these unaudited consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company’s financial position and results of operations as at the end of and for the periods presented. The results of operations for any interim period are not necessarily indicative of the results for a full year. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. The major estimates reflected in the Company’s consolidated financial statements include the reserve for losses and loss expenses, premium estimates for business written on a line slip or proportional basis, and reinsurance recoverable balances. The terms “FAS” and “FASB” used in these notes refer to Statements of Financial Accounting Standards issued by the United States Financial Accounting Standards Board.

This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 filed with the Securities and Exchange Commission (the “SEC”) on March 9, 2006.

2. New Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.” FIN 48 prescribes detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” Tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods.

FIN 48 will be effective for fiscal years beginning after December 15, 2006 and the provisions of FIN 48 will be applied to all tax positions upon initial adoption of the Interpretation. The cumulative effect of applying the provisions of this Interpretation will be reported as an adjustment to the opening balance of retained earnings for that fiscal year. The company is currently evaluating the potential impact of FIN 48 on its financial statements.

3. Segment Information

The Company evaluates the performance of its insurance and reinsurance segments based on underwriting results. The Company writes business that has loss experience generally characterized as low frequency and high severity. This may result in volatility in both the Company’s and an individual segment’s operating results and cash flows. The Company does not allocate its assets by segment as it evaluates the underwriting results of each segment separately from the results of its investment portfolio.

Insurance

The Company’s insurance segment provides insurance coverage on a worldwide basis and is divided into two sub-segments: global insurance and U.S. insurance.

Global insurance provides specialty lines coverage, predominantly through the London broker network. The product lines in this segment are property, marine, terrorism and war risk, aviation and aerospace, political risk, professional lines and other specialty.

U.S. insurance provides specialty lines coverage through a variety of channels in the U.S. and covers exposures predominantly in the U.S. The product lines in this segment are property, professional lines, liability and other specialty and are offered through wholesale brokers, retail brokers and managing general agents and underwriters.

Reinsurance

The Company’s reinsurance segment provides treaty property and casualty reinsurance to insurance companies on a worldwide basis. Treaty reinsurance contracts are contractual arrangements that provide for automatic reinsurance of any agreed upon portion of business written as specified in a reinsurance contract. Contracts can be written on an excess of loss basis or a pro rata basis, also known as proportional. The product lines in this segment are catastrophe, property, professional liability, credit and bond, motor, liability and other.

The following tables summarize the underwriting results, income before income taxes, ratios and the reserves for losses and loss expenses for the Company’s reportable operating segments and sub-segments for the quarters and six months ended June 30, 2006 and 2005.

Quarter ended June 30, 2006

	Global Insurance			U.S. Insurance			Total Insurance			Reinsurance			Corporate			Total
Revenues:
Gross premiums written	$	313,235		$	316,370		$	629,605		$	365,775		$	—		$	995,380
Net premiums written	278,370			176,656			455,026			365,706			—			820,732
Net premiums earned	180,568			143,003			323,571			355,528			—			679,099
Other insurance related income	—			438			438			—			—			438
Net losses and loss expenses	(68,883		)	(78,902		)	(147,785		)	(224,197		)	—			(371,982		)
Acquisition costs	(23,753		)	(15,001		)	(38,754		)	(63,078		)	—			(101,832		)
General and administrative expenses	(11,304		)	(23,569		)	(34,873		)	(11,501		)	—			(46,374		)
Underwriting income	76,628			25,969			102,597			56,752			—			159,349
Corporate expenses													(11,283		)	(11,283		)
Net investment income													91,663			91,663
Realized losses on investments													(9,777		)	(9,777		)
Foreign exchange gains													18,901			18,901
Interest expense													(8,315		)	(8,315		)
Income before income taxes																$	240,538

Net loss and loss expense ratio	38.1		%	55.2		%	45.7		%	63.1		%				54.8		%
Acquisition cost ratio	13.2		%	10.5		%	12.0		%	17.7		%				15.0		%
General and administrative expense ratio	6.3		%	16.5		%	10.8		%	3.2		%	1.7		%	8.5		%
Combined ratio	57.6		%	82.2		%	68.5		%	84.0		%				78.3		%

Reserve for losses and loss expenses	$	1,494,526		$	1,534,406		$	3,028,932		$	1,806,229		n/a			$	4,835,161

Quarter ended June 30, 2005

	Global Insurance			U.S. Insurance			Total Insurance			Reinsurance			Corporate		Total
Revenues:
Gross premiums written	$	227,512		$	285,470		$	512,982		$	254,311		—		$	767,293
Net premiums written	214,005			151,098			365,103			250,693			—		615,796
Net premiums earned	204,717			108,321			313,038			311,375			—		624,413
Other insurance related income	(5,627		)	326			(5,301		)	(150		)	—		(5,451		)
Net losses and loss expenses	(78,039		)	(70,658		)	(148,697		)	(174,156		)	—		(322,853		)
Acquisition costs	(26,455		)	(3,695		)	(30,150		)	(55,321		)	—		(85,471		)
General and administrative expenses	(9,632		)	(20,777		)	(30,409		)	(12,330		)	—		(42,739		)
Underwriting income	84,964			13,517			98,481			69,418			—		167,899
Corporate expenses													(14,057	)	(14,057		)
Net investment income													58,001		58,001
Realized gains on investments													1,831		1,831
Foreign exchange losses													(27,226	)	(27,226		)
Interest expense													(7,818	)	(7,818		)
Income before income taxes															$	178,630

Net loss and loss expense ratio	38.1		%	65.2		%	47.5		%	55.9		%			51.7		%
Acquisition cost ratio	12.9		%	3.4		%	9.6		%	17.8		%			13.7		%
General and administrative expense ratio	4.7		%	19.2		%	9.7		%	4.0		%	2.2	%	9.1		%
Combined ratio	55.7		%	87.8		%	66.8		%	77.7		%			74.5		%

Reserve for losses and loss expenses	$	951,874		$	930,807		$	1,882,681		$	1,047,018		n/a		$	2,929,699

Six months ended June 30, 2006

	Global Insurance			U.S. Insurance			Total Insurance			Reinsurance			Corporate			Total
Revenues:
Gross premiums written	$	523,033		$	543,622		$	1,066,655		$	1,093,465		$	—		$	2,160,120
Net premiums written	435,556			294,620			730,176			1,082,884			—			1,813,060
Net premiums earned	365,767			280,517			646,284			666,409			—			1,312,693
Other insurance related income	—			1,062			1,062			—			—			1,062
Net losses and loss expenses	(149,322		)	(154,633		)	(303,955		)	(426,685		)	—			(730,640		)
Acquisition costs	(51,142		)	(25,068		)	(76,210		)	(115,326		)	—			(191,536		)
Corporate general and administrative expenses	(21,172		)	(46,756		)	(67,928		)	(22,215		)	—			(90,143		)
Underwriting income	144,131			55,122			199,253			102,183			—			301,436
Corporate expenses													(22,925		)	(22,925		)
Net investment income													185,231			185,231
Realized losses on investments													(20,706		)	(20,706		)
Foreign exchange gains													28,165			28,165
Interest expense													(16,400		)	(16,400		)
Income before income taxes																$	454,801

Net loss and loss expense ratio	40.8		%	55.1		%	47.0		%	64.0		%				55.7		%
Acquisition cost ratio	14.0		%	8.9		%	11.8		%	17.3		%				14.6		%
General and administrative expense ratio	5.8		%	16.7		%	10.5		%	3.3		%	1.7		%	8.6		%
Combined ratio	60.6		%	80.7		%	69.3		%	84.6		%				78.9		%

Reserve for losses and loss expenses	$	1,494,526		$	1,534,406		$	3,028,932		$	1,806,229		n/a			$	4,835,161

Six months ended June 30, 2005

	Global Insurance			U.S. Insurance			Total Insurance			Reinsurance			Corporate		Total
Revenues:
Gross premiums written	$	479,835		$	462,396		$	942,231		$	1,023,761		—		$	1,965,992
Net premiums written	417,435			242,330			659,765			1,018,102			—		1,677,867
Net premiums earned	421,575			214,822			636,397			613,606			—		1,250,003
Other insurance related income	(5,865		)	346			(5,519		)	—			—		(5,519		)
Net losses and loss expenses	(143,934		)	(142,376		)	(286,310		)	(380,833		)	—		(667,143		)
Acquisition costs	(59,537		)	(6,739		)	(66,276		)	(110,496		)	—		(176,772		)
General and administrative expenses	(19,484		)	(41,088		)	(60,572		)	(24,631		)	—		(85,203		)
Underwriting income	192,755			24,965			217,720			97,646			—		315,366
Corporate expenses													(25,895	)	(25,895		)
Net investment income													110,759		110,759
Realized gains losses on investments													438		438
Foreign exchange losses													(50,644	)	(50,644		)
Interest expense													(15,897	)	(15,897		)
Income before income taxes															$	334,127

Net loss and loss expense ratio	34.1		%	66.3		%	45.0		%	62.1		%			53.4		%
Acquisition cost ratio	14.1		%	3.1		%	10.4		%	18.0		%			14.1		%
General and administrative expense ratio	4.6		%	19.1		%	9.5		%	4.0		%	2.1	%	8.9		%
Combined ratio	52.8		%	88.5		%	64.9		%	84.1		%			76.4		%

Reserve for losses and loss expenses	$	951,874		$	930,807		$	1,882,681		$	1,047,018		n/a		$	2,929,699

4. Benefit plans

(a) Employee Benefit Plans

1) Retirement Plans

The Company provides retirement benefits to eligible employees through various plans sponsored by the Company.

(i) Defined contribution plans

The Company has several defined contribution plans that are managed externally pursuant to which employees and the Company contribute on a monthly basis. During the quarter ended June 30, 2006, pension expenses totaled $2,014 (June 30, 2005: $1,434). During the six months ended June 30, 2006, pension expenses totaled $3,621 (June 30, 2005: $2,925).

(ii) Defined benefit plans

Effective January 1, 2004, the Company implemented supplemental retirement plans (“SERPs”) for two executives. The SERP for Mr. Charman requires the Company to make annual payments to Mr. Charman upon his retirement for a period of 20 years. The benefits vest over a period of two years commencing in 2006.

Commencing at age 56, Mr. Charman is entitled to an annual payment of $750 compounded by 3% annually for each year commencing from inception. The SERP for Mr. Butt requires the Company to make annual payments to Mr. Butt upon his retirement for a period of 10 years. The benefits vest over a period of two years commencing in 2006. Commencing at age 66, Mr. Butt is entitled to an annual payment of $250 compounded by 3% annually for each year commencing from inception. If either Mr. Charman or Mr. Butt dies, is permanently disabled or a change of control of the Company occurs, the remaining benefits under his plan are payable by the Company in a lump sum. The benefits received under the SERPs will be reduced by the benefits received by the executives under the Company’s Bermuda retirement plan. The measurement date of the plan was January 1, 2005. The plan was fully funded in January 2006.

Effective May 12, 2006, the SERP for Mr. Butt was amended to delay by one year the timing of retirement benefits to be paid to Mr. Butt and to increase the amount of retirement benefits by $100 for the first five years of retirement.

The following table shows the components of pension expense for the quarters and six months ended June 30, 2006 and 2005 and the amounts included in the Company’s Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005 for the Company’s SERPs:

	Quarters ended					Six Months ended
	June 30, 2006			June 30, 2005		June 30, 2006			June 30, 2005
Components of pension expense
Amortization of prior service cost	$	568		$	537	$	1,136		$	1,073
Interest cost	185			171		369			342
Expected return on plan assets	(179		)	—		(358		)	—
Pension expense	$	574		$	708	$	1,147		$	1,415

The weighted-average assumptions used to determine net periodic pension cost and benefit obligations were:

	Quarters ended				Six Months ended
	June 30, 2006		June 30, 2005		June 30, 2006		June 30, 2005
Discount rate	5.8	%	6.0	%	5.8	%	6.0	%
Expected return on plan assets	5.8	%	6.0	%	5.8	%	6.0	%

	June 30, 2006		December 31, 2005
Changes in plan assets
Fair value of plan assets at beginning of period	$	—	$	—
Expected return on plan assets	358		—
Employer contribution	12,840		—
Fair value of plan assets at end of period	$	13,198	$	—

	June 30, 2006		December 31, 2005
Components of benefit obligation
Benefit obligation at beginning of period	$	12,439	$	11,371
Interest cost	369		683
Amendments	379		385
Benefit obligation at end of period	$	13,187	$	12,439

Reconciliation of Funded Status
Funded Status	$	—	$	(12,439	)
Unrecognized loss	385		385
Unrecognized prior service cost	5,289		6,436
Prepaid (accrued) benefit cost	$	5,674	$	(5,618	)

2) Long Term Equity Compensation Plan

The Company has adopted a Long-Term Equity Compensation Plan (“LTEC”) that provides for the grant of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock awards, performance share and performance unit awards and share purchase rights. The maximum number of common shares with respect to which awards may be granted under the plan is 14,855,192, of which 1,200,000 are available for issuance pursuant to share purchase rights and of which 13,655,192 are available for issuance under all other awards. The plan is administered by the Compensation Committee of the Board of Directors.

Effective January 1, 2006, the Company adopted, prospectively, the fair value recognition provisions of FAS No. 123 (revised) “Share-Based Payments (“FAS No. 123 (R)”) for all stock options and restricted shares that were outstanding on January 1, 2006 that are granted or subsequently modified or cancelled. Compensation expense for stock options and for restricted stock awards granted to employees is recorded over the vesting period using the fair value method, net of estimated forfeitures. For awards that have a graded vesting schedule, the Company recognizes compensation expense on a straight-line basis over the vesting period for each separate vesting portion of the award as if the award was, in-substance, multiple awards. The Company has not issued awards subject to performance and market conditions.

The compensation cost recognized in the six months of fiscal 2006 includes compensation cost for all share-based payments granted prior to, but not vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with FAS No. 123, “Accounting for Stock-Based Compensation” (“FAS 123”), and compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with FAS No. 123 (R). Prior periods have not been restated to reflect the adoption of the new standard. The adoption of FAS No. 123 (R) did not have a significant impact on net income and basic and diluted earnings per share for the three months ended June 30, 2006.

On January 1, 2003, the Company adopted FAS No. 123 by applying the prospective method permitted under FAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” Prior to 2003, the Company followed Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations in accounting for its employee stock compensation. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FAS 123 to all of its stock-based compensation prior to January 1, 2003.

	Quarters Ended						Six Months Ended
	June 30, 2006			June 30, 2005			June 30, 2006			June 30, 2005
Net income available to common shareholders, as reported	$	223,400		$	172,845		$	418,585		$	324,644
Add: Stock-based employee compensation expense included in net income, net of related tax effects	5,505			5,448			10,724			10,505
Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards, net of related tax effects	(5,505		)	(5,626		)	(10,724		)	(10,862		)
Pro-forma net income available to common shareholders	$	223,400		$	172,667		$	418,585		$	324,287
Earnings per common share:
Basic—as reported	$	1.49		$	1.23		$	2.80		$	2.26

Basic—pro-forma	$	1.49		$	1.23		$	2.80		$	2.26

Diluted—as reported	$	1.37		$	1.13		$	2.56		$	2.07

Diluted—pro-forma	$	1.37		$	1.12		$	2.56		$	2.07

(i) Options

Options granted under the plan generally expire 10 years after the date of grant and generally vest ratably on an annual basis over three years from the date of grant. Exercise prices are established at the fair value of the Company’s common shares at the date of grant. Upon exercise, new shares are issued by the Company.

During the quarter ended June 30, 2006, the Company expensed $1,220 (quarter ended June 30, 2005: $1,058) related to the grant of options and realized a tax benefit of $262 (quarter ended June 30, 2005: $176). During the six months ended June 30, 2006, the Company expensed $1,637 (six months ended June 30, 2005: $2,113) related to the grant of options and realized a tax benefit of $830 (six months ended June 30, 2005: $354). At June 30, 2006, there was $2,378 of unrecognized compensation cost related to options which is expected to be recognized over the weighted average period of 1 year. The total intrinsic value of options exercised during the six months ended June 30, 2006 was $9,086 (year ended December 31, 2005: $10,258) and the Company received proceeds of $14,013 (year ended December 31, 2005: $8,585). The total intrinsic value of options vested at June 30, 2006, was $52,060 (year ended December 31, 2005: $69,886). The fair value of options granted during 2006 was $213 (year ended December 31, 2005: $6,413). The grants in 2006 reflect modifications to grants made in prior years to an employee pursuant to a severance agreement filed in an 8-K with the SEC on February 23, 2006. The earlier grants were deemed cancelled and new grants issued at the new terms. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 2006: risk free interest rates of 4.6% (2005: 4.2%), expected life of 0.3 years (2005: 7.0 years), a dividend yield of 1.7% (2005: 2.5%) and an expected volatility of 20% (2005: 22%). The Company has elected to use the simplified method of calculating the expected life of the options, which is the average of the vesting period and the expiry period.

The following is a summary of stock options granted under the LTEC and related activity:

	Six months ended June 30, 2006				Year ended December 31, 2005
	Number of Options		Weighted Average Exercise Price		Number of Options		Weighted Average Exercise Price
Outstanding—beginning of period	6,054,464		$	18.99	5,622,181		$	16.38
Granted	45,000		26.90		1,269,834		28.01
Exercised	(749,782	)	18.70		(653,881	)	13.13
Forfeited	(57,833	)	27.32		(183,670	)	25.92
Outstanding—end of period	5,291,849		$	19.01	6,054,464		$	18.99

The following table summarizes information about the Company’s stock options for options granted under the LTEC and outstanding as of June 30, 2006:

	Options Outstanding				Options Exercisable
Range of Exercise prices	Number of Options	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Number of Options	Weighted Average Exercise Price
$12.50-$13.75	2,603,847	$	12.55	5.59	2,603,847	$	12.55
$13.76-$15.00	671,000	14.50		6.45	671,000	14.50
$15.01-$16.25	53,334	16.25		6.92	53,334	16.25
$16.26-$25.65	59,000	25.54		7.33	39,334	25.54
$25.66-$29.62	1,904,668	$	28.82	7.89	981,886	$	29.10

In addition, the Company receives a tax deduction for certain stock option exercises in the period of exercise. In accordance with FAS No. 123 (R), the consolidated statement of cash flows for the six months ended June 30, 2006 includes excess tax benefits of $627 on exercise of stock options as a financing cash flow.

(ii) Restricted Stock

The fair value of restricted share grants is determined using the closing price of the Company’s shares on the New York Stock Exchange on the day prior to the grant, with grants generally vesting three years after the date of grant or upon the employee’s earlier retirement, death, permanent disability or a change in control of the Company. Restricted shares are entitled to vote and to receive dividends but may not be transferred during the period of restriction and are forfeited if the employee’s employment terminates prior to vesting. Compensation cost equivalent to the estimated fair market value at the date of grant for the number of shares expected to fully vest is amortized over a three-year vesting period. As of June 30, 2006, there was $40,084 of unrecognized compensation cost related to these awards which is expected to be recognized over the weighted average period of 2 years. The total fair value of shares vested during the six months ended June 30, 2006 was $2,387 (year ended 2005: $25,699). During the quarter ended June 30, 2006, the Company expensed $5,283 (quarter ended June 30, 2005: $5,040) in respect of restricted stock, and recorded tax benefits thereon of $942 (quarter ended June 30, 2005: $577). During the six months ended June 30, 2006, the Company expensed $10,871 (six months ended June 30, 2005: $9,925) in respect of restricted stock, and recorded tax benefits thereon of $1,809 (six months ended June 30, 2005: $1,412).

The following is a summary of restricted stock granted under the LTEC and related activity:

	June 30, 2006				December 31, 2005
	Number of Shares		Weighted Average Grant-Date Fair Value		Number of Shares		Weighted Average Grant-Date Fair Value
Nonvested —beginning of period	1,175,750		$	28.40	2,126,700		$	17.36
Granted	1,273,500		31.01		898,750		28.35
Vested	(86,000	)	27.75		(1,723,300	)	14.91
Forfeited	(77,250	)	25.42		(126,400	)	26.18
Nonvested—end of period	2,286,000		$	29.98	1,175,750		$	28.40

The grants in 2006 include modifications to grants made in prior years to an employee pursuant to a severance agreement filed in an 8-K with the SEC on February 23, 2006. The earlier grants were deemed cancelled and new grants issued at the new terms.

(b) Director Benefit Plans

(1) 2004 Directors Long-Term Equity Compensation Plan

The Company has adopted a Directors Long-Term Equity Compensation Plan (“DLTECP”) that provides for the grant of non-qualified stock options and stock awards (restricted and unrestricted) to non-employee directors of the Company. The maximum number of common shares with respect to which awards may be granted under the plan is 1,200,000. The plan is administered by the Compensation Committee of the Board of Directors.

(i) Options

During the quarter ended June 30, 2006, the Company expensed $53 (quarter ended June 30, 2005: $43) related to the grant of options. During the six months ended June 30, 2006, the Company expensed $78 (six months ended June 30, 2005: $91) related to the grant of options. At June 30, 2006, there was $105 of unrecognized compensation cost related to options which is expected to be recognized over the weighted average period of 1 year. The total intrinsic value of options exercised during the six months ended June 30, 2006 was $94 (December 31, 2005: $nil) and the Company received proceeds of $318 (year ended December 31, 2005: $nil) and realized a tax benefit of $nil (year ended December 31, 2005: $nil). The total intrinsic value of options vested at June 30, 2006, was $345 (December 31, 2005: $343). There were no option grants during the six months ended June 30, 2006, and the fair value of options granted during 2005 was $257. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 2005: risk free interest rates of 4.2%, expected life of 7 years, a dividend yield of 2.5% and an expected volatility of 22%. The Company has elected to use the simplified method of calculating the expected life of the options, which is the average of the vesting period and the expiry period.

The following is a summary of stock options granted under the DLTECP and related activity:

	Six Months ended June 30, 2006				Year ended December 31, 2005
	Number of Options		Weighted Average Exercise Price		Number of Options	Weighted Average Exercise Price
Outstanding—beginning of period	120,000		$	25.19	72,000	$	23.68
Granted	-		-		48,000	27.45
Exercised	(13,332	)	23.84		—	—
Outstanding—end of period	106,668		$	25.36	120,000	$	25.19

The following table summarizes information about the Company’s stock options granted under the DLTECP and for options outstanding as of June 30, 2006:

	Options Outstanding				Options Exercisable
Range of Exercise prices	Number of Options	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Number of Options	Weighted Average Exercise Price
$15.01-$16.25	26,667	$	16.25	6.59	26,667	$	16.25
$25.66-$29.62	80,001	$	28.39	8.16	34,668	$	28.79

(ii) Restricted Stock

The fair value of restricted share grants is determined using the closing price of the Company’s shares on the New York Stock Exchange on the day prior to the grant, with grants generally vesting six months after the date of grant or upon the director’s earlier retirement, death, permanent disability or a change in control of the Company. Restricted shares are entitled to vote and to receive dividends but may not be transferred during the period of restriction and are forfeited if the director resigns prior to vesting. Compensation cost equivalent to the estimated fair market value at the date of grant for the number of shares expected to fully vest is amortized over a six-month vesting period. As of June 30, 2006, there was $17 of unrecognized compensation cost related to these awards. The total fair value of shares vested during the quarter ended June 30, 2006 was $nil (year ended December 31, 2005: $120). During the quarter ended June 30, 2006, the Company expensed $80 (quarter ended June 30, 2005: $60) in respect of restricted stock, and recorded no tax benefits. During the six months ended June 30, 2006, the Company expensed $150 (quarter ended June 30, 2005: $117) in respect of restricted stock, and recorded no tax benefits.

The following is a summary of restricted stock granted under the DLTECP and related activity:

	Six months ended June 30, 2006			Year ended December 31, 2005
	Number of Shares	Weighted Average Grant Date Fair Value		Number of Shares		Weighted Average Grant Date Fair Value
Nonvested —beginning of period	—	$	—	—		$	—
Granted	5,590	31.31		4,368		27.45
Vested	—	—		(4,368	)	27.45
Nonvested—end of period	5,590	$	31.31	—		$	—

In addition, directors may elect to receive their fees in common shares rather than cash. As at June 30, 2006, 43,912 (December 31, 2005: 40,235) common shares had been granted under the plan in lieu of fees. All awards are made at the fair market value of the common shares at the time of the grant.

(ii) 2004 Directors Deferred Compensation Plan

The Company has an unfunded nonqualified deferred compensation plan that allows participating directors to elect (i) the amount, if any, of cash or stock as fees for services to be deferred and (ii) the form in which payment is to be made. Directors who choose to defer fees otherwise payable in shares are credited a number of phantom stock units equal in amount to the number of shares of stock deferred. In the event a cash dividend is declared on the stock, the portion of the participant’s deferral account denominated in phantom share units is credited with additional phantom share units (or portions thereof). Directors who choose to defer fees otherwise payable in cash are credited with interest on their cash deferral at a rate for the year of deferral that is 100 basis points above the 12-month LIBOR rate for deposits of U.S. dollars. Generally, benefits are paid upon termination of service as a director. As at June 30, 2006, 35,657 (December 31, 2005: 31,411) phantom share units had been issued under the plan in lieu of fees, and 10,001 (December 31, 2005: 6,657) had been issued in lieu of restricted shares.

5. Investments

The following table summarizes the fixed maturity investments in an unrealized loss position at June 30, 2006 and December 31, 2005 and the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position:

As at June 30, 2006:

	12 months or greater					Less than 12 months					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S. government and agency securities	$	381,466	$	(13,849	)	$	977,323	$	(28,052	)	$	1,358,789	$	(41,901	)
Non - U.S. government securities	1,431		(79		)	156,344		(3,455		)	157,775		(3,534		)
Corporate securities	310,266		(10,447		)	632,369		(19,418		)	942,635		(29,865		)
Mortgage-backed securities	444,446		(20,916		)	1,971,394		(68,350		)	2,415,840		(89,266		)
Asset-backed securities	134,803		(3,052		)	173,566		(2,162		)	308,369		(5,214		)
Municipals	67,790		(2,388		)	264,550		(5,855		)	332,340		(8,243		)
Total	$	1,340,202	$	(50,731	)	$	4,175,546	$	(127,292	)	$	5,515,748	$	(178,023	)

As at December 31, 2005:

	12 months or greater					Less than 12 months					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S. government and agency securities	$	527,787	$	(10,823	)	$	746,012	$	(9,406	)	$	1,273,799	$	(20,229	)
Non - U.S. government securities	-		-			115,871		(6,196		)	115,871		(6,196		)
Corporate securities	258,287		(6,361		)	813,927		(14,314		)	1,072,214		(20,675		)
Mortgage-backed securities	309,808		(8,980		)	1,674,865		(27,262		)	1,984,673		(36,242		)
Asset-backed securities	107,636		(2,198		)	85,714		(1,217		)	193,350		(3,415		)
Municipals	55,720		(1,476		)	157,116		(1,356		)	212,836		(2,832		)
Total	$	1,259,238	$	(29,838	)	$	3,593,505	$	(59,751	)	$	4,852,743	$	(89,589	)

As of June 30, 2006, there were approximately 2,320 securities (2005: 2,113) in an unrealized loss position with a fair market value of $5,515.7 (2005: $4,852.7). Of these securities, there are 752 securities (2005: 517) that have been in an unrealized loss position for 12 months or greater with a fair market value of $1,340.2 (2005: $1,259.2). The unrealized losses from these securities were not a result of credit, collateral or structural issues. As of June 30, 2006, thirteen (2005: none) of these securities were considered to be other than temporarily impaired resulting in an impairment charge of $0.6 million for the six months ended June 30, 2006.

6. Debt and Financing Arrangements

a) Senior Notes

On November 15, 2004, the Company issued $500.0 million of senior unsecured debt (“Senior Notes”) at an issue price of 99.785%, generating net proceeds of $495.7 million. The Senior Notes bear interest at a rate of 5.75%, payable semi-annually in arrears on June 1 and December 1 of each year. Unless previously redeemed, the Senior Notes will mature on December 1, 2014. The Company may redeem the Senior Notes at any time and from time to time, in whole or in part, at a “make-whole” redemption price, however, the Company has no current intentions of calling the Senior Notes. The Senior Notes indenture contains various covenants, including limitations on liens on the stock of restricted subsidiaries, restrictions as to the disposition of the stock of restricted subsidiaries and limitations on mergers and consolidations. The Company was in compliance with all the

covenants contained in the Senior Notes indenture at June 30, 2006. The market value of the Senior Notes at June 30, 2006 was $469.2 million (December 31, 2005: $498.5 million).

Interest expense includes interest payable, amortization of the offering discount and amortization of debt offering expenses. The offering discount and debt offering expenses are amortized over the period of time during which the Senior Notes are outstanding. For the quarters ended June 30, 2006 and 2005, the Company incurred interest expense for the Senior Notes of $7.3 million. For the six months ended June 30, 2006 and 2005, the company incurred interest expense for the Senior Notes of $14.6 million.

b) Credit Facilities

As at June 30, 2006, the Company had a $1.5 billion credit facility agreement with a syndicate of lenders. The credit agreement is an unsecured five-year facility that allows the Company and its operating subsidiaries to issue letters of credit up to the full amount of the facility and to borrow up to $500.0 million for general corporate purposes, with total usage not to exceed $1.5 billion. The credit agreement contains various loan covenants, including limitations on the incurrence of future indebtedness, future liens, fundamental changes, investments and certain transactions with affiliates. The facility also requires that the Company maintain 1) a minimum consolidated net worth of $2.0 billion plus (A) 25% of consolidated net income (if positive) of AXIS Capital for each semi-annual fiscal period ending on or after December 31, 2005 plus (B) an amount equal to 25% of the net cash proceeds received by AXIS Capital from the issuance of its capital stock during each such semi-annual fiscal period and 2) a maximum debt to total capitalization ratio of 0.35:1.0. The Company was in compliance with all covenants contained in the credit agreement at June 30, 2006. As at June 30, 2006, the Company had letters of credit of $608.1 million (December 31, 2005: $685.1 million) outstanding. There was no debt outstanding under the credit facility as at June 30, 2006 or December 31, 2005.

7. Earnings Per Common Share

The following table sets forth the calculation of basic and diluted earnings per common share:

	Quarters ended				Six months ended
	June 30, 2006		June 30, 2005		June 30, 2006		June 30, 2005
Basic earnings per common share
Net income available to common shareholders	$	223,400	$	172,845	$	418,585	$	324,644
Weighted average common shares outstanding	149,765,181		140,566,523		149,541,163		143,584,354
Basic earnings per common share - basic	$	1.49	$	1.23	$	2.80	$	2.26

Diluted earnings per common share
Net income available to common shareholders	$	223,400	$	172,845	$	418,585	$	324,644
Weighted average common shares outstanding	149,765,181		140,566,523		149,541,163		143,584,354
Share equivalents
Warrants	11,006,209		10,485,432		11,320,152		10,656,522
Options	1,780,378		2,143,648		1,906,398		2,202,168
Restricted stock	773,691		442,147		673,928		570,460
Weighted average common shares and common share equivalents outstanding — diluted	163,325,459		153,637,750		163,441,641		157,013,504
Diluted earnings per common share	$	1.37	$	1.13	$	2.56	$	2.07

Share equivalents that will result in the issuance of common shares of 1,620,168, 1,763,959, 3,615,618, 1,735,875 were outstanding for the quarters and six months ended June 30, 2006 and 2005, respectively, but were not included in the computation of diluted earnings per share because the effect would be antidilutive.

8. Commitments and Contingencies

a) Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of investments and reinsurance recoverab